15

ANALYSIS OF FINANCIAL
STATEMENTS
LEARNING OUTCOMES

After studying this chapter, you would be able to:

 Examine the key features of the financial statements and its relevancy for
better reporting.
 Examine the key factors to be kept in mind in the preparation of financial
statements.
 Follow the best practices in the preparation of financial statements.
 Analyse the common mistakes incurred by the preparers of the financial
statements in the presentation of financial statements with respect to
Schedule III.
 Rectify the mistakes found in the financial statements by addressing the
issues and prescribing the correct presentation and disclosures.

© The Institute of Chartered Accountants of India

 15.2 FINANCIAL REPORTING

CHAPTER OVERVIEW

Analysis of Financial Statements

Characteristics of good Best Practices Common Illustrations

financial statements Defects in FS
Compliance
Schedule III
True and fair view Complete Disclosure

Relevance
Simple and specific Disclosure of
Balance
Understand ability Sheet Items
Transparency

Consistency
Materiality
Disclosure of
Regulatory Compliance Statement of
Integration of Notes Profit and
Loss Items
Universality
Disclosure of
significant Disclosure of
accounting Other Items
of Financial
Disclosures of key Statements
estimates and
judgements Other
Constituents
Integrated approach of Financial
Statements

Consolidated
Financial
Statements

Based on Ind AS

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.3

1. INTRODUCTION
Business is important organ of society that helps in its overall development. A typical business
has a variety of stakeholder that include its employees, owners, banks, trade associations,
government, general public and so on. These stakeholders, particularly investors are keenly
interested in knowing about the financial well-being of business organisations.
Financial reporting is an important means of communication for entities to disseminate information
of its operations to various stakeholders. With the increased focus on governance the significance
of financial reporting has exponentially increased. The importance of robust financial reporting
cannot be emphasized enough. As India and Indian enterprises move ahead in the growth path
at much faster pace and exposure of Indian entities to global environment expands, ever
increasing complexities of transactions throws up newer challenges in financial reporting and
related guidance. Presentation and disclosures, in this context, are assuming greater significance
as enterprises aim to achieve excellence in financial reporting. Today, there are a number of
requirements mandated by the regulators. It has now become imperative for entities to keep pace
with the fast evolving requirements in the area of financial reporting.
The financial statements are a source of critical communication between an entity and the
investors and other stakeholders. They act as the barometer to assess the performance, both
past and future, for any enterprise. Decades back when enterprises were mostly proprietary
owned, the financial statements were simpler in content and were presented annually just to
provide the historical data. However, with globalization and increased dependence on technology,
where companies are expanding both horizontally and vertically, many even spanning across
geographies; the number of stakeholders – be it be investors, suppliers, employees, or even tax
authorities, have increased manifold.
The financial statements are supplemented with the disclosures which are the key source of
information and help the users in interpreting the financial statements in a better manner in taking
appropriate decisions. Therefore, one can say that disclosures are added for good reasons.
Disclosures are not the only requirement which will make a financial statement to be a good
financial statement. The presentation and the compliance of formats are also the important factors
which are taken into consideration in the evaluation of a financial statement.
This chapter enumerates some of the practices currently being followed in financial reporting and
sets out suggested ‘best practice’ to enhance the quality of financial reporting to enable preparers
of financial statements in benchmarking their financial statements. It intends to bring to the notice
of the preparers and reviewers of the financial statements some common errors or omissions
which they shall avoid while preparing the financial statements.

© The Institute of Chartered Accountants of India

 15.4 FINANCIAL REPORTING

2. FINANCIAL STATEMENTS OF CORPORATE ENTITIES

The format and content of the financial statements for companies is required to be in accordance
with Schedule III to the Companies Act, 2013. Further, there are several additional disclosure
requirements both with respect to the balance sheet and statement of profit and loss.
Certain industries have formats specified by their industry regulators, which need to be followed
by them. This fact has also been recognised in the Companies Act, 2013 in the proviso to Section
129(1) which implies that the format set out in Schedule III will not be applicable to insurance
companies and banking companies. The formats for these companies are prescribed by specific
regulators.
In terms of format, Schedule III only prescribes the vertical format of balance sheet and does not
provide the alternative of using the horizontal format. Further, Schedule III sets out the minimum
requirements for disclosure on the face of the balance sheet and the statement of profit and loss.
It allows line items, sub-line items and sub-totals to be presented as an addition or substitution on
the face of the financial statements when such presentation is relevant to an understanding of the
company’s financial position or performance or to cater to industry/sector-specific disclosure
requirements or when required for compliance with the amendments to the Companies Act or
under the Standards. Schedule III now requires all disclosures to be made as a part of the notes.
Apart from granting an overriding status to the Standards, cognizance has also been given to the
requirements of Standards in the format of the balance sheet and accordingly elements such as
deferred tax assets and intangible assets have been included in the balance sheet. Also, it has
been clearly stated that the disclosure requirements specified in Part I and Part II or Part III of the
Schedule III are in addition to and not in substitution of the disclosure requirements specified in
the respective notified Standards. The terms used in Schedule III are to be considered as per the
respective notified Standards.
One of the pertinent aspect which needs to be considered in the preparation of financial
statements with regard to Schedule III is that it does not prescribe the accounting treatment to be
adopted by the entity; it only prescribes the format and content. Consequently, the fact that a
particular item has been included in the format of the balance sheet in Schedule III does not imply
that the particular item can be recognized in the balance sheet. Schedule III prescribes only
presentation and not treatment which is a subject matter of Standards, which has also been
specifically acknowledged in Schedule III.

3. CHARACTERISTICS OF GOOD FINANCIAL

STATEMENTS
In the Indian scenario, the ICAI has been the recognized accounting body issuing generally
accepted accounting policies, and has made the standards mandatory for enterprises operating
within India. Besides Accounting Standards, ICAI has also issued the converged set of Ind AS

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.5

that is adopted and notified by MCA, and many large entities have already implemented it or are
in the transition phase for adoption (depending on the net worth or other specified criteria).

The key features to any set of financial statements are:

1. True and fair view of the affairs of the enterprise: This is the most important feature of
any set of financial statements. The user of the financial statements depends fully on the
same and hence the reliability factor is supreme.
2. Relevance: The financial statements should provide the relevant information for the
period it is presented. There is no point in presenting historical data of past several years
that are redundant as of date. The key here is that the user of the financial statements should
be in a position to take independent decision after reading the financial statements. This
decision can be different for different users – for an investor the decision whether to hold the
shares of the enterprise will stem from the set of statements, for a senior employee of the
company it can be the future growth prospects of the company etc. But what is important is
that the users should be empowered to make decisions through the financial statements
3. Understandability: For the user to make sense, the financial statements should be readable
and content lucid to digest. Even a layman should be able to read the same, and understand
the basic information, if not the accounting policies and procedures.
4. Consistency: The users of the financial statements will be benefitted only if the statements
are released in periodic intervals and in standard formats. Else, the entire purpose of
furnishing financials will be defeated. That’s the reason that laws are prescribed for
presentation formats and periodicity.
5. Regulatory Compliance: Needless to say, the tax authorities, market regulators etc. rely
hugely on financial statements to understand and gauge the compliances met by the
enterprise.
6. Universality: Last but not the least; the financial statements should be comparable both
within the industry and outside. So financial statements by two different companies should
look in similar lines if both are engaged in, say, manufacturing steel. Likewise, the financials
of a company manufacturing steel in India should be comparable to the set of financial
statements of a company based out of US engaged in the similar line of business.
The need to have the above key characteristics have brought the accounting bodies world over to
come together to have a set of common standards for better integration and harmonization of
accounting principles and practices.

© The Institute of Chartered Accountants of India

 15.6 FINANCIAL REPORTING

True and fair

view of the
affairs of the
enterprise

Universality Relevance

Good Financial
Statements

Regulatory Understanda
Compliance bility

Consistency

4. BEST PRACTICES - APPLICABLE TO ALL COMPANIES

Following are some of the practices, if followed by the preparers of the financial statements, it
would lead to better presentation and disclosure and will also serve the meaningful purpose for
various stakeholders in understanding the functioning, financial position and financial performance
of the entity and in appropriate decision making:
1. Compliance
Financial reporting is a regulated activity and compliance with the requirements is a must.
Comply with the standards and regulations but also ensure your financial statements are an
effective part of your wider communication with your stakeholders. It should be simple and
understandable without any change in the interpretation.
Example :
Usage of the term ‘remaining maturity’ instead of ‘original maturity’ while describing cash and
cash equivalents.
2. Complete
The information disclosed in the financial statements should be complete and should not lead
to any further cross questioning in the mind of the users. Ensure consistency of disclosures
across the financial statements.

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.7

Example :
Where the accounting policy states that “Balances of debtors, creditors and loans and
advances are subject to reconciliations and confirmations”. This indicates that these balances
may or may not be appropriately stated as well as raising questions regarding the
appropriateness of the audit process.
3. Simple and specific
• Draft your notes, accounting policies, commentary on more complex areas in simple and
plain English. Ensuring that there are no vague or ambiguous notes.
Example :
The definition of a derivative and a hedged item and how the company uses such items:
“A derivative is a type of financial instrument the company uses to manage risk. It is
something that derives its value based on an underlying asset. It's generally in the form
of a contract between two parties entered into for a fixed period. Underlying variables,
such as exchange rates, will cause its value to change over time. A hedge is where the
company uses a derivative to manage its underlying exposure. The company's main
exposure is to fluctuation in foreign exchange risk. We manage this risk by hedging forex
movements, in effecting the boundaries of exchange rate changes to manageable,
affordable amounts.”
• Make your policies clear and specific.
• Ensure that there should not be any vague or ambiguous notes, with no further information
or explanation which may lead to misinterpretation of information.
• Reduce generic disclosures and focus on company specific disclosures that explain how
the company applies the policies.
Example :
A note stated “Land not registered in the name of the company has been given for the use
of group companies”. However, there are no disclosures regarding such lease elsewhere
in the financial statements. This leads to ambiguity regarding whether the land has been
capitalized in the books of account or not.
A better disclosure would be to include this note in the note relating to ‘Property, plant
and Equipment’ with an asterix against land and a note which states “Land includes area
measuring XX acres, towards which the registration process is still in progress. This land
has been given on lease to group companies.”

© The Institute of Chartered Accountants of India

 15.8 FINANCIAL REPORTING

4. Transparency
In preparation of financial statements many a times certain assumptions, or other bases are
taken. Disclose those assumptions and bases transparently, so that they users are not misled.
Rather such transparency shall provide useful additional information and substantiate your
decision/judgement.
5. Materiality
• The lack of clarity in how to apply the concept of materiality is perceived to be one of the
main drivers for overloaded financial statements. Make effective use of materiality to
enhance the clarity and conciseness of your financial statements.
• Information should only be disclosed if it is material. It is material if it could influence
users’ decisions which are based on the financial statements.
• Your materiality assessment is the ‘filter’ in deciding what information to disclose and what
to omit.
• Once you have determined which specific line items require disclosure, you should assess
what to disclose about these items, including how much detail to provide and how best to
organise the information.
Example: Capital Commitments
A company has committed to purchase several items of property, plant and equipment.
Individually each purchase is immaterial. However, the total amounts to a material
commitment for the company and therefore some disclosure should be made regarding
this commitment.
Example : New Revenue Stream
A company in the software sector has communicated to its stakeholders a strategic
intention to focus its new development efforts in cloud-based solutions. In a particular
financial year cloud-based revenues are less than 5% of the total but have grown rapidly.
The company therefore decides to provide separate disclosure about this revenue
stream in accordance with Ind AS 108 ‘Operating Segments’ even though other revenue
streams of similar size are typically combined into ‘other revenue.’
6. Integration of Notes
• Notes cover the largest portion of the financial statements. They are an effective tool of
communication and have the greatest impact on the effectiveness of your financial
statements.
• Group notes into categories, place the most critical information more prominently or a
combination of both.

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.9

• Integrate your main note of a line item with its accounting policy and any relevant key
estimates and judgements.
Example: Inventories
1. Accounting Policy
Inventories are stated at the lower of cost and net realisable value. Cost includes all
expenses directly attributable to the manufacturing process as well as suitable portions of
related production overheads, based on normal operating capacity. Costs of ordinarily
interchangeable items are assigned using the first in, first out cost formula. Net realisable
value is the estimated selling price in the ordinary course of business less any applicable
selling expenses.
2. Significant Estimation of Uncertainty
Management estimates the net realisable values of inventories, taking into account the
most reliable evidence available at each reporting date. The future realisation of these
inventories may be affected by future technology or other market-driven changes that may
reduce future selling prices.
3. Inventories consist of the following: (` in crores)
31 st March, 20X2 31 st March, 20X1
Raw materials and consumables 7,000 6,000
Merchandise 11,000 9,000
18,000 15,000
• Ensuring that the accounting policies are disclosed in one place and not scattered
across various notes.
For example, in one case it was observed that the policy of recognizing 100% depreciation
on assets costing less than ` 5,000 was specified in the note on fixed assets, rather than
in the accounting policy for fixed assets.
7. Disclosure of Significant Accounting Policies
• The financial statements should disclose your significant accounting policies. Disclose
only your significant accounting policies – remove your non-significant disclosures that do
not add any value.
• Your disclosures should be relevant, specific to your company and explain how you apply
your policies.
• The aim of accounting policy disclosures is to help your investors and other stakeholders
to properly understand your financial statements.

© The Institute of Chartered Accountants of India

 15.10 FINANCIAL REPORTING

• Use judgement to determine whether your accounting policies are significant, considering
not only the materiality of the balances or transactions affected by the policy but also other
factors including the nature of the company’s operations.
Example:
Taxable temporary differences arise on certain brands and licenses that were acquired in
past business combinations. Management considers that these assets have an indefinite life
and are expected to be consumed by use in the business. For these assets deferred tax is
recognised using the capital gains tax applicable on sale.
8. Disclosures of Key Estimates and Judgements
• Effective disclosures about the most important estimates and judgements enable
investors to understand your financial statements.
• Focus on the most difficult, subjective and complex estimates.
• Include details of how the estimate was derived, key assumptions involved, the process
for reviewing and an analysis of its sensitiveness.
• Provide sufficient background information on the judgement, explain how the judgement
was made and the conclusion reached.
9. Integrated Approach
• Financial statements are just one part of your communication with the stakeholders. An
annual report typically includes financial statements, a management commentary and
information about governance, strategy and business developments, CSR Reporting,
Business Responsibility Reporting etc. There is also a growing trend towards integrated
reporting.
• To ensure overall effective communication consider the annual report as a whole and
deliver a consistent and coherent message throughout.
• Ind AS 1 also acknowledges that one may present, outside the financial statements, a
financial review that describes and explains the main features of the company’s financial
performance and financial position, and the principal uncertainties it faces.
• Many companies also present, outside the financial statements, reports and statements
such as environmental reports and value added statements, particularly in industries in
which environmental factors are significant and when employees are regarded as an
important user group.
• Even though the reports and statements presented outside financial statements are
outside the scope of AS / Ind AS, they are not out of the scope of regulation.
Example :
CSR disclosures, as required by the Companies Act, 2013. in section 134 and
Schedule VII.

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.11

5. CASE STUDIES BASED ON IND AS

Case Study 1
On 1st April, 20X1, Pluto Ltd. has advance a loan for ` 10 lakhs to one of its employees for an interest
rate at 4% per annum (market rate 10%) which is repayable in 5 equal annual installments along
with interest at each year end. Employee is not required to give any specific performance against
this benefit.
The accountant of the company has recognised the staff loan in the balance sheet equivalent to the
amount disbursed i.e. ` 10 lakhs. The interest income for the period is recognised at the contracted
rate in the Statement of Profit and Loss by the company i.e. ` 40,000 (` 10 lakhs x 4%).
Analyse whether the above accounting treatment made by the accountant is in compliance with
the Ind AS. If not, advise the correct treatment alongwith working for the same.
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 32 and
Ind AS 109 on Financial Instruments’ and Ind AS 19 ‘Employee Benefits’.
Para 11 (c) (i) of Ind AS 32 ‘Financial Instruments : Presentation’ states that:
“A financial asset is any asset that is:
(c) a contractual right:
(i) to receive cash or…..”
Further, paragraph 5.1.1 of Ind AS 109 states that:
“at initial recognition, an entity shall measure a financial asset or financial liability at its fair value”.
Further, paragraph 5.1.1 of Appendix B to Ind AS 109 states that:
“The fair value of a financial instrument at initial recognition is normally the transaction price (i.e.
the fair value of the consideration given or received. However, if part of the consideration given
or received is for something other than the financial instrument, an entity shall measure the fair
value of the financial instrument. For example, the fair value of a long term loan or receivable that
carries no interest can be measured as the present value of all future cash receipts discounted
using the prevailing market(s) of interest rate of similar instrument with a similar credit rating. Any
additional amount lent is an expense or reduction of income unless it qualifies for recognition as
some other type of asset”.
Further, paragraph 5.2.1 of Ind AS 109 states that:
“After initial recognition, an entity shall measure a financial asset at:
(a) amortised cost;

© The Institute of Chartered Accountants of India

 15.12 FINANCIAL REPORTING

(b) fair value through other comprehensive income; or

(c) fair value through profit or loss.
Further, paragraph 5.4.1 of Ind AS 109 states that:
“Interest revenue shall be calculated by using the effective interest method. This shall be
calculated by applying the effective interest rate to the gross carrying amount of a financial asset”
Paragraph 8 of Ind AS 19 states that:
“Employee Benefits are all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment”.
The Accountant of Pluto Ltd. has recognised the staff loan in the balance sheet at ` 10 lakhs
being the amount disbursed and ` 40,000 as interest income for the period is recognised at the
contracted rate in the statement of profit and loss which is not correct and not in accordance with
Ind AS 19, Ind AS 32 and Ind AS 109.
Accordingly, the staff advance being a financial asset shall be initially measured at the fair value
and subsequently at the amortised cost. The interest income is calculated by using the effective
interest method. The difference between the amount lent and fair value is charged as Employee
benefit expense in statement of profit and loss.
a) Calculation of Fair Value of the Loan
Year Cash Inflow Discounting Factor Present Value
(10%)
1 2,40,000 0.909 2,18,160
2 2,32,000 0.826 1,91,632
3 2,24,000 0.751 1,68,224
4 2,16,000 0.683 1,47,528
5 2,08,000 0.621 1,29,168
Total 8,54,712

Staff loan should be initially recorded at ` 8,54,712.

b) Employee Benefit Expense
Loan Amount – Fair Value of the loan = ` 10,00,000 – ` 8,54,712 = ` 1,45,288
` 1,45,288 shall be charged as Employee Benefit expense in Statement of Profit and Loss for
the year ended 31.03.20X2.

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.13

Amortisation table:
Year Opening Interest (10%) Repayment Closing
balance of balance of
Staff Advance Staff Advance
(b)= (a x (c) (d) = a + b -c
(a) 10%)
1 8,54,712 85,471 2,40,000 7,00,183
2 7,00,183 70,018 2,32,000 5,38,201
3 5,38,201 53,820 2,24,000 3,68,021
4 3,68,021 36,802 2,16,000 1,88,823
5 1,88,823 19,177 (b.f.) 2,08,000 Nil

Balance Sheet extracts showing the presentation of staff loan as at 31 st March, 20X2
Ind AS compliant Division II of Sch III needs to be referred for presentation requirement in Balance
Sheet on Ind AS.

Assets
Non-Current Assets
Financial Assets
(i) Loan 5,38,201
Current Assets
Financial Assets
(i) Loans (7,00,183 - 5,38,201) 1,61,982
Case Study 2
Pluto Ltd. has purchased a manufacturing plant for ` 6 lakhs on 1st April, 20X1. The useful life of
the plant is 10 years. On 30th September, 20X3, Pluto temporarily stops using the manufacturing
plant because demand has declined. However, the plant is maintained in a workable condition
and it will be used in future when demand picks up.
The accountant of Pluto ltd. decided to treat the plant as held for sale until the demands picks up
and accordingly measures the plant at lower of carrying amount and fair value less cost to sell.
Also, the accountant has also stopped charging the depreciation for the rest of period considering
the plant as held for sale. The fair value less cost to sell on 30 th September, 20X3 and
31st March, 20X4 was ` 4 lakhs and ` 3.5 lakhs respectively.

© The Institute of Chartered Accountants of India

 15.14 FINANCIAL REPORTING

The accountant has performed the following working: `

Carrying amount on initial classification as held for sale
Purchase Price of Plant 6,00,000
Less: Accumulated dep (6,00,000/ 10 Years) x 2.5 years (1,50,000) 4,50,000
Fair Value less cost to sell as on 30 th September, 20X3 4,00,000
The value will be lower of the above two 4,00,000

Balance Sheet extracts as on 31 st March, 20X4

Assets
Current Assets
Other Current Assets
Assets classified as held for sale 3,50,000

Analyse whether the above accounting treatment made by the accountant is in compliance with
the Ind AS. If not, advise the correct treatment alongwith the necessary workings.
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 16
‘Property, Plant and Equipment’ and Ind AS 105 ‘Non-current Assets Held for Sale and
Discontinued Operations’.
Para 6 of Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’ states that:
“An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying
amount will be recovered principally through a sale transaction rather than through continuing
use”.
Paragraph 7 of Ind AS 105 states that:
“For this to be the case, the asset (or disposal group) must be available for immediate sale in its
present condition subject only to terms that are usual and customary for sales of such assets (or
disposal groups) and its sale must be highly probable. Thus, an asset (or disposal group) cannot
be classified as a non-current asset (or disposal group) held for sale, if the entity intends to sell it
in a distant future”.
Further, paragraph 8 of Ind AS 105 states that:
“For the sale to be highly probable, the appropriate level of management must be committed to a
plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete
the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed
for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.15

be expected to qualify for recognition as a completed sale within one year from the date of
classification and actions required to complete the plan should indicate that it is unlikely that
significant changes to the plan will be made or that the plan will be withdrawn.”
Paragraph 13 of Ind AS 105 states that:
“An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned. This is because its carrying amount will be recovered principally through continuing
use.”
Paragraph 14 of Ind AS 105 states that:
“An entity shall not account for a non-current asset that has been temporarily taken out of use as
if it had been abandoned.”
Paragraph 55 of Ind AS 16 states that:
“Depreciation does not cease when the asset becomes idle or is retired from active use unless
the asset is fully depreciated.”
Going by the guidance given above,
The Accountant of Pluto Ltd. has treated the plant as held for sale and measured it at the fair
value less cost to sell. Also, the depreciation has not been charged thereon since the date of
classification as held for sale which is not correct and not in accordance with Ind AS 105 and Ind
AS 16.
Accordingly, the manufacturing plant should neither be treated as abandoned asset nor as held
for sale because its carrying amount will be principally recovered through continuous use. Pluto
Ltd. shall not stop charging depreciation or treat the plant as held for sale because its carrying
amount will be recovered principally through continuing use to the end of their economic life.
The working of the same for presenting in the balance sheet is given as below:
Calculation of carrying amount as on 31 st March, 20X4
Purchase Price of Plant 6,00,000
Less: Accumulated depreciation (6,00,000/ 10 Years) x 3 Years (1,80,000)
4,20,000
Less: Impairment loss (70,000)
3,50,000
Balance Sheet extracts as on 31 st March, 20X4
Assets
Non-Current Assets
Property, Plant and Equipment 3,50,000

© The Institute of Chartered Accountants of India

 15.16 FINANCIAL REPORTING

Working Note:
Fair value less cost to sell of the Plant = ` 3,50,000
Value in Use (not given) or = Nil (since plant has temporarily not been used for
manufacturing due to decline in demand)
Recoverable amount = higher of above i.e. ` 3,50,000
Impairment loss = Carrying amount – Recoverable amount
Impairment loss = ` 4,20,000 - ` 3,50,000 = ` 70,000.
Case Study 3
On 5th April, 20X2, fire damaged a consignment of inventory at one of the Jupiter’s Ltd.’s
warehouse. This inventory had been manufactured prior to 31 st March, 20X2 costing ` 8 lakhs.
The net realisable value of the inventory prior to the damage was estimated at ` 9.60 lakhs.
Because of the damage caused to the consignment of inventory, the company was required to
spend an additional amount of ` 2 lakhs on repairing and re-packaging of the inventory. The
inventory was sold on 15 th May, 20X2 for proceeds of ` 9 lakhs.
The accountant of Jupiter Ltd treats this event as an adjusting event and adjusted this event of
causing the damage to the inventory in its financial statement and accordingly re-measures the
inventories as follows: ` lakhs
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value) 7.60
Analyse whether the above accounting treatment made by the accountant in regard to financial
year ending on 31.0.20X2 is in compliance of the Ind AS. If not, advise the correct treatment
alongwith working for the same.
Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 10 ‘Events
after the Reporting Period’ and Ind AS 2 ‘Inventories’.
Para 3 of Ind AS 10 ‘Events after the Reporting Period’ defines “Events after the reporting period
are those events, favourable and unfavourable, that occur between the end of the reporting period
and the date when the financial statements are approved by the Board of Directors in case of a
company, and, by the corresponding approving authority in case of any other entity for issue. Two
types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.17

(b) those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period).
Further, paragraph 10 of Ind AS 10 states that:
“An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period”.
Further, paragraph 6 of Ind AS 2 defines:
“Net realisable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale”.
Further, paragraph 9 of Ind AS 2 states that:
“Inventories shall be measured at the lower of cost and net realisable value”.
Accountant of Jupiter Ltd. has re-measured the inventories after adjusting the event in its financial
statement which is not correct and nor in accordance with provision of Ind AS 2 and Ind AS 10.
Accordingly, the event causing the damage to the inventory occurred after the reporting date and
as per the principles laid down under Ind AS 10 ‘Events After the Reporting Date’ is a non-
adjusting event as it does not affect conditions at the reporting date. Non-adjusting events are
not recognised in the financial statements, but are disclosed where their effect is material.
Therefore, as per the provisions of Ind AS 2 and Ind AS 10, the consignment of inventories shall
be recorded in the Balance Sheet at a value of ` 8 Lakhs calculated below:
` ’ lakhs
Cost 8.00
Net realisable value 9.60
Inventories (lower of cost and net realisable value) 8.00
Case Study 4
On 1st April, 20X1, Sun Ltd. has acquired 100% shares of Earth Ltd. for ` 30 lakhs. Sun Ltd. has
3 cash-generating units A, B and C with fair value of ` 12 lakhs, ` 8 lakhs and ` 4 lakhs
respectively. The company recognizes goodwill of Rs 6 lakhs that relates to CGU ‘C’ only.
During the financial year 20X2-20X3, the CFO of the company has a view that there is no
requirement of any impairment testing for any CGU since their recoverable amount is
comparatively higher than the carrying amount and believes there is no indicator of impairment.
Analyse whether the view adopted by the CFO of Sun Ltd is in compliance of the Ind AS. If not,
advise the correct treatment in accordance with relevant Ind AS

© The Institute of Chartered Accountants of India

 15.18 FINANCIAL REPORTING

Solution
The above treatment needs to be examined in the light of the provisions given in Ind AS 36:
Impairment of Assets.
Para 9 of Ind AS 36 ‘Impairment of Assets’ states that “An entity shall assess at the end of each
reporting period whether there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of the asset.”
Further, paragraph 10(b) of Ind AS 36 states that:
“Irrespective of whether there is any indication of impairment, an entity shall also test goodwill
acquired in a business combination for impairment annually.”
Sun Ltd has not tested any CGU on account of not having any indication of impairment is partially
correct i.e. in respect of CGU A and B but not for CGU C. Hence, the treatment made by the
Company is not in accordance with Ind AS 36.
Accordingly, impairment testing in respect of CGU A and B are not required since there are no
indications of impairment. However, Sun Ltd shall test CGU C irrespective of any indication of
impairment annually as the goodwill acquired on business combination is fully allocated to
CGU ‘C’.

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.19

TEST YOUR KNOWLEDGE

Questions
1. Venus Ltd. is a multinational entity that owns three properties. All three properties were
purchased on 1st April, 20X1. The details of purchase price and market values of the properties
are given as follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out
Purchase price 15,000 10,000 12,000
Market value 31.03.20X2 16,000 11,000 13,500
Life 10 Years 10 Years 10 Years
Subsequent Measurement Cost Model Revaluation Model Revaluation Model

Property 1 and 2 are used by Venus Ltd. as factory building whilst property 3 is let-out to a non-
related party at a market rent. The management presents all three properties in balance sheet
as ‘property, plant and equipment’.
The Company does not depreciate any of the properties on the basis that the fair values are
exceeding their carrying amount and recognise the difference between purchase price and fair
value in Statement of Profit and Loss.
Required:
Analyse whether the accounting policies adopted by the Venus Ltd. in relation to these
properties is in accordance with Ind AS. If not, advise the correct treatment alongwith working
for the same.
2. On 1st January, 20X2, Sun Ltd. was notified that a customer was taking legal action against the
company in respect of a financial losses incurred by the customer. Customer alleged that the
financial losses were caused due to supply of faulty products on 30th September, 20X1 by the
Company. Sun Ltd. defended the case but considered, based on the progress of the case up
to 31st March, 20X2, that there was a 75% probability they would have to pay damages of
` 10 lakhs to the customer.
However, the accountant of Sun Ltd. has not recorded this transaction in its financial statement
as the case is not yet finally settled. The case was ultimately settled against the company
resulting in to payment of damages of ` 12 lakhs to the customer on 15th May, 20X2. The
financials have been authorized by the Board of Directors in its meeting held on 18th May, 20X2.

© The Institute of Chartered Accountants of India

 15.20 FINANCIAL REPORTING

Analyse whether the above accounting treatment made by the accountant is in compliance of
the Ind AS. If not, advise the correct treatment along with working for the same.
3. Mercury Ltd. is an entity engaged in plantation and farming on a large scale diversified across
India. On 1st April, 20X1, the company has received a government grant for ` 10 lakhs subject
to a condition that it will continue to engage in plantation of eucalyptus tree for a coming period
of five years.
The management has a reasonable assurance that the entity will comply with condition of
engaging in the plantation of eucalyptus tree for specified period of five years and accordingly
it recognises proportionate grant for ` 2 lakhs in Statement of Profit and Loss as income
following the principles laid down under Ind AS 20 Accounting for Government Grants and
Disclosure of Government Assistance.
Analyse whether the above accounting treatment made by the management is in compliance
of the Ind AS. If not, advise the correct treatment alongwith working for the same.
4. Mercury Ltd. has sold goods to Mars Ltd. at a consideration of ` 10 lakhs, the receipt of which
receivable in three equal installments of ` 3,33,333 over a two year period (receipts on
1st April, 20X1, 31st March, 20X2 and 31st March, 20X3).
The company is offering a discount of 5 % (i.e. ` 50,000) if payment is made in full at the time
of sale. The sale agreement reflects an implicit interest rate of 5.36% p.a.
The total consideration to be received from such sale is at ` 10 Lakhs and hence, the
management has recognised the revenue from sale of goods for ` 10 lakhs. Further, the
management is of the view that there is no difference in this aspect between Indian GAAP and
Ind AS.
Analyse whether the above accounting treatment made by the accountant is in compliance of
the Ind AS. If not, advise the correct treatment along with working for the same.
Answers
1. The above issue needs to be examined in the umbrella of the provisions given in Ind AS 1
‘Presentation of Financial Statements’, Ind AS 16 ‘Property, Plant and Equipment’ in relation
to property ‘1’ and ‘2’ and Ind AS 40 ‘Investment Property’ in relation to property ‘3’.
Property ‘1’ and ‘2’
Para 6 of Ind AS 16 ‘Property, Plant and Equipment’ defines:
“Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period.”

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.21

Paragraph 29 of Ind AS 16 states that:

“An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment”.
Further, paragraph 36 of Ind AS 16 states that:
“If an item of property, plant and equipment is revalued, the entire class of property, plant
and equipment to which that asset belongs shall be revalued”.
Further, paragraph 39 of Ind AS 16 states that:
“If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be
recognised in other comprehensive income and accumulated in equity under the heading of
revaluation surplus. However, the increase shall be recognised in profit or loss to the extent
that it reverses a revaluation decrease of the same asset previously recognised in profit or
loss”.
Further, paragraph 52 of Ind AS 16 states that:
“Depreciation is recognised even if the fair value of the asset exceeds its carrying amount,
as long as the asset’s residual value does not exceed its carrying amount”.
Property ‘3’
Para 6 of Ind AS 40 ‘Investment property’ defines:
“Investment property is property (land or a building—or part of a building—or both) held (by
the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation
or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business”.
Further, paragraph 30 of Ind AS 40 states that:
“An entity shall adopt as its accounting policy the cost model to all of its investment property”.
Further, paragraph 79 (e) of Ind AS 40 requires that:
“An entity shall disclose the fair value of investment property”.
Further, paragraph 54 (2) of Ind AS 1 ‘Presentation of Financial Statements’ requires that:
“As a minimum, the balance sheet shall include line items that present the following amounts:
(a) property, plant and equipment;
(b) investment property;
As per the facts given in the question, Venus Ltd. has
(a) presented all three properties in balance sheet as ‘property, plant and equipment’;

© The Institute of Chartered Accountants of India

 15.22 FINANCIAL REPORTING

(b) applied different accounting policies to Property ‘1’ and ‘2’;

(c) revaluation is charged in statement of profit and loss as profit; and
(d) applied revaluation model to Property ‘3’ being classified as Investment Property.
These accounting treatment is neither correct nor in accordance with provision of Ind AS 1,
Ind AS 16 and Ind AS 40.
Accordingly, Venus Ltd. shall apply the same accounting policy (i.e. either revaluation or cost
model) to entire class of property being property ‘1’ and ‘2”. It also required to depreciate
these properties irrespective of that, their fair value exceeds the carrying amount. The
revaluation gain shall be recognised in other comprehensive income and accumulated in
equity under the heading of revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified as
Investment Property and only cost model is permitted for subsequent measurement. However,
Venus ltd. is required to disclose the fair value of the property in the Notes to Accounts. Also the
property ‘3’ shall be presented as separate line item as Investment Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation of
these three properties in the balance sheet is as follows:
Case 1: Venus Ltd. has applied the Cost Model to an entire class of property, plant and
equipment.
Balance Sheet extracts as at 31 st March, 20X2 `
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment Properties
Property ‘3’ 10,800
Case 2: Venus Ltd. has applied the Revaluation Model to an entire class of property,
plant and equipment.
Balance Sheet extracts as at 31 st March, 20X2 `

Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 16,000

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.23

Property ‘2’ 11,000 27,000

Investment Properties
Property ‘3’ 10,800
Equity and Liabilities
Other Equity
Revaluation Reserve
Property ‘1’ 2,500
Property ‘2’ 2,000 4,500

The revaluation reserve should be routed through Other Comprehensive Income

(subsequently not reclassified to Profit and Loss) in Statement of Profit and Loss and Shown
as a separate column in Statement of Changes in Equity.
2. The above treatment needs to be examined in the light of the provisions given in Ind AS 37
‘Provisions, Contingent Liabilities and Contingent Assets’ and Ind AS 10 ‘Events After the
Reporting Period’.
Para 10 of Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ defines:
“Provision is a liability of uncertain timing or amount.
Liability is a present obligation of the entity arising from past events, the settlement of which
is expected to result in an outflow from the entity of resources embodying economic benefits”.
Further, paragraph 14 of Ind AS 37, states:
“A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) it is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation”.
Further, paragraph 36 of Ind AS 37, states:
“The amount recognised as a provision shall be the best estimate of the expenditure required
to settle the present obligation at the end of the reporting period”.
Further, paragraph 3 of Ind AS 10 ‘Events after the Reporting Period’ defines:
“Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are
approved by the Board of Directors in case of a company, and, by the corresponding

© The Institute of Chartered Accountants of India

 15.24 FINANCIAL REPORTING

approving authority in case of any other entity for issue. Two types of events can be
identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period).
Further, paragraph 8 of Ind AS 10 states that:
“An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
events after the reporting period.”
The Accountant of Sun Ltd. has not recognised the provision and accordingly not adjusted
the amounts recognised in its financial statements to reflect adjusting events after the
reporting period is not correct and nor in accordance with provision of Ind AS 37 and Ind
AS 10.
As per given facts, the potential payment of damages to the customer is an obligation arising
out of a past event which can be reliably estimated. Therefore, following the provision of
Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ – a provision is required.
The provision should be for the best estimate of the expenditure required to settle the
obligation at 31st March, 20X2 which comes to ` 7.5 lakhs (` 10 lakhs x 75%).
Further, following the principles of Ind AS 10 ‘Events After the Reporting Period’ evidence of
the settlement amount is an adjusting event. Therefore, the amount of provision created
shall be increased to ` 12 lakhs and accordingly be recognised as a current liability.
3. As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41
Agriculture shall be applicable to this company.
The above facts need to be examined in the light of the provisions given in Ind AS 20
‘Accounting for Government Grants and Disclosure of Government Assistance’ and
Ind AS 41 ‘Agriculture’.
Para 2(d) of Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government
Assistance’ states:
“This Standard does not deal with government grants covered by Ind AS 41, Agriculture”.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:
“This Standard shall be applied to account for the government grants covered by
paragraphs 34 and 35 when they relate to agricultural activity”.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:

© The Institute of Chartered Accountants of India

 ANALYSIS OF FINANCIAL STATEMENTS 15.25

“If a government grant related to a biological asset measured at its fair value less costs to
sell is conditional, including when a government grant requires an entity not to engage in
specified agricultural activity, an entity shall recognise the government grant in profit or loss
when, and only when, the conditions attaching to the government grant are met”.
Understanding of the given facts, The Company has recognised the proportionate grant for
` 2 lakhs in Statement of Profit and Loss before the conditions attaching to government grant are
met which is not correct and nor in accordance with provision of Ind AS 41 ‘Agriculture’.
Accordingly, the accounting treatment of government grant received by the Mercury Ltd. is
governed by the provision of Ind AS 41 ‘Agriculture’ rather Ind AS 20 ‘Accounting for
Government Grants and Disclosure of Government Assistance’.
Government grant for ` 10 lakhs shall be recognised in profit or loss when, and only when,
the conditions attaching to the government grant are met i.e. after the expiry of specified
period of five years of continuing engagement in the plantation of eucalyptus tree.
Balance Sheet extracts showing the presentation of Government Grant
as on 31 st March, 20X2 `
Liabilities
Non-Current liabilities
Other Non-Current Liabilities
Government Grants 10,00,000
4. The revenue from sale of goods shall be recognised at the fair value of the consideration
received or receivable. The fair value of the consideration is determined by discounting all
future receipts using an imputed rate of interest where the receipt is deferred beyond normal
credit terms. The difference between the fair value and the nominal amount of the consideration
is recognised as interest revenue.
The fair value of consideration (cash price equivalent) of the sale of goods is calculated as
follows: `
Year Consideration Present value Present value of
(Installment) factor consideration
Time of sale 3,33,333 - 3,33,333
End of 1 year
st 3,33,333 0.949 3,16,333
End of 2 nd year 3,33,334 0.901 3,00,334
10,00,000 9,50,000
The Company that agrees for deferring the cash inflow from sale of goods will recognise the
revenue from sale of goods and finance income as follows:

© The Institute of Chartered Accountants of India

 15.26 FINANCIAL REPORTING

Initial recognition of sale of goods ` `

Cash Dr. 3,33,333
Trade Receivable Dr. 6,16,667
To Sale 9,50,000
Recognition of interest expense and receipt of
second installment
Cash Dr. 3,33,333
To Interest Income 33,053
To Trade Receivable 3,00,280
Recognition of interest expense and payment
of final installment
Cash Dr. 3,33,334
To Interest Income (Balancing figure) 16,947
To Trade Receivable 3,16,387
Balance Sheet (extracts) as at 31 st March, 20X2 and 31 st March, 20X3
`
As at 31 st March, 20X2 As at 31 st March, 20X3
Income
Sale of Goods 9,50,000 -
Other Income (Finance income) 33,053 16,947
Statement of Profit and Loss (extracts)
for the year ended 31 st March, 20X2 and 31 st March, 20X3
`
As at 31 st March, 20X2 As at 31 st March, 20X3
Assets
Current Assets
Financial Assets
Trade Receivables 3,16,387 XXX

© The Institute of Chartered Accountants of India